Precious metals: Three things to watch in 2013

If the gold/silver ratio falls below 50 it is often a good indication that both gold and silver are

Precious metals have been in a two-year trading range. Though gold rose 10.2% in 2011 and 7.0% in 2012, these rates are below the 16.8% average annual appreciation gold has achieved over the past 12 years.

Importantly, by being in a trading range, it is clear that the precious metals have refused to break lower despite repeated attempts by the gold cartel that occasionally gave the precious metals a severe pummeling. So given the precious metals dogged determination to absorb whatever was thrown at them throughout this period – which is a sign of underlying strength – we can reasonably expect gold and silver to start moving higher soon.

I discussed this point in a recent King World News interview, which also mentioned short-term overhead resistance levels. In an interview with KWN at the beginning of this month, I presented my 2013 outlook, the important point being the potential for a black-swan event like the one experienced in 2008, with the Lehman Brothers collapse. The reason for this worrying outlook is simple. The interrelated sovereign debt and bank solvency crises have not been solved. So the outlook for gold and silver remains very bullish.

So gold and silver will probably break out of their two-year trading soon, and as a consequence, the appreciation in 2013 for both precious metals will exceed their 12-year annual average. Therefore, my expectation for 2013 is that gold will probably rise at least 20%. Silver will also do better than its 12-year average of 20.1% per annum.

I’m not going to try predicting how high silver will rise. Rather, I will just re-affirm my longstanding expectation that when silver finally clears resistance around $36-$37, it will jump to $68-$70 in 2-to-3 months. Its inevitable breakout above $50 will mean that silver has entered the second stage of its bull market.

I have already noted above that it is the ongoing monetary and financial problems that will drive gold and silver higher this year. So here are three things that I am watching as 2013 progresses.

1) The yield on the 10-year T-note climbs above 2%. This yield is probably the tipping point signaling that the Federal Reserve through its financial repression cannot keep interest rates artificially low any longer. In other words, market forces will finally overpower the Fed.

2) The gold/silver ratio falls below 50. This event will signal that silver is outperforming gold, which is often a good indication that both gold and silver are ready to jump higher, but with silver rising faster than gold.

3) The Federal Reserve balance sheet starts growing. The Fed generally expanded its balance sheet from the start of the 2008 crisis to a peak of $2.86 trillion of assets in July 2011, which is actually higher than its current total of $2.81 trillion.

Many years ago prominent newsletter writer Richard Russell coined the phrase “inflate or die” to explain the Fed’s predicament. The financial system has become so abnormal, the Fed has to keep inflating to prevent the system from literally going off the rails. But the irony is that eventually the financial system dies as a consequence of accumulated inflation.

The alternative of course is to return to sound money based on precious metals. And until that happens, we individuals need to keep accumulating gold and silver, which remain undervalued.

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